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Tuesday, 12 September 2017 09:30

Moody's: Azerbaijan's credit profile reflects country's vulnerability to volatile oil prices

Azerbaijan's Ba2 rating and stable outlook reflect the vulnerability of the economy, government finances and banking system to oil price volatility, Moody's Investors Service said in an annual report today.


The report, "Government of Azerbaijan -- Ba2 stable, Annual Credit Analysis", is now available on Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.


"The drop in oil prices resulted in a prolonged recession in Azerbaijan and has put pressure on the government and external finances," said Kristin Lindow, a Moody's Senior Vice President and co-author of the report. "Although the government's finances are supported by a large sovereign wealth fund with a value equivalent to nearly 90% of GDP, the outlook for oil and gas revenue is sufficiently constrained that the government has limited flexibility to use the fund's resources for counter-cyclical fiscal policy that would soften the impact of lower oil prices",  Caspian Energy News ( reports with reference to Moody's.

Moody's expects that Azerbaijan's economy will contract for the second consecutive year in 2017. In the first half of the year, the economy shrank by 1.4% compared to a year earlier, and Moody's believes that the contraction for the whole year will be at a similar rate.


Oil prices remain relatively low and credit is continuing to shrink rapidly amid ongoing banking sector distress. It is unclear whether the economy will hit bottom this year in light of the government's pro-cyclical fiscal consolidation, tight monetary policy and a managed float of the exchange rate that is not allowing the manat currency to find its market-determined level.


The government and central bank have tried to shore up the country's banking sector over the past year, a process that has cost roughly 30% of GDP, in particular through the cost of restructuring the country's largest bank, the International Bank of Azerbaijan (IBA), which is nearly 100% state-owned.


Despite the restructuring, Moody's believes that the bank will still face challenges in restoring asset quality and profitability amidst managing its remaining open foreign-currency position. The wider banking system will also remain weak for some time.


The country's gross debt-to-GDP ratio, including explicit government guarantees, increased steeply to 50.7% in 2016 from 14.4% in 2014 due mainly to the large depreciation of the manat and an increase in government guaranteed debt.


Given still weak economic dynamics, Moody's anticipates fiscal deficits of 2.9% and 1.8% of GDP in 2017 and 2018, respectively, assuming oil prices stay in the range of $45-$55 per barrel over the period.


Decisive action to address the key challenges in the country's credit profile, namely the erosion in fiscal strength, the lack of economic and export diversity and the weak banking sector, would generate upward pressure on the rating.


However, any improvement would be unreliable if founded solely on rising oil prices, as distinct from a gradual diversification of the economy to address the high dependence on oil, and a more strongly capitalized, liquid banking system.


The ratings would come under negative pressure if the government's balance sheet deterioration were to continue beyond 2018, particularly if that was associated with further banking sector shocks and increased budgetary reliance on the sovereign wealth fund's assets that further eroded the country's net creditor position.

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Person in charge of the newsline: Fidan Isayeva



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